HedgeyeRetail Visual: Unemployment: Who’s to Benefit?

The unemployment rate continues to improve relative to last year across all age groups. The fastest improving demographic is the 25-34 age group which is net positive for much of discretionary retail, while the weakest improvement is in the older consumer (55 and older), who spends less on the margin in the mall and online.

Commercial Printing in Secular Decline, Stocks a Potential Short Squeeze

Commercial Printing has been the top performing Industrials sub-industry over the past 30 days, in what appears to be a bit of a short squeeze. Given that short interest is *one-third* of the float in names like RRD and QUAD, this could well continue.

Substitution of digital media for print media has left the commercial printing industry with chronic excess capacity – it is a current example of an industry in decline.

A more significant squeeze in RRD or QUAD could present an interesting entry point for shorts in this troubled industry.

Sector Comment: Navistar’s call this morning raised more questions than answers for us. It seems that it did for the market as well. We expect to launch our next detailed “black book” on commercial trucking in coming weeks and will have more to say then. For now, we again note that NAV has significant liabilities (pension and debt) that make it less “cheap” than it feels relative to better organized competitors.

Reminder: Expert Call This Wednesday at 1PM

We have an expert call coming up on July 11th at 1PM to discuss AMR/US Air and other regulatory matters. Our expert will be Lisa Harig, a Partner at McBreen & Kopko and head of the firm’s Washington D.C. office. She is a former in-house counsel for Trans World Airlines, Inc. and BearingPoint, Inc. Ms. Harig represents domestic and international clients, including airlines and manufacturers. Her practice focuses on a wide range of corporate, transactional, compliance and regulatory matters, including representation before the U.S. Department of Transportation and Federal Aviation Administration. Please contact us or your Hedgeye Sales representative to participate.

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07/06/12 02:17 PM EDT

Unemployment Chart of the Day

Jumping back to the JUN jobs report, the key takeaway from our analysis is that the US labor market remains firmly stuck in the mud, failing to improve or outright deteriorating on a number of key metrics:

Not that anyone was expecting a major step forward, but it’s clear that the data firmly implies the US labor market remains far worse off than the headline Unemployment Rate (SA) of 8.2% would suggest. You know conditions are not good when an 8.2% Unemployment Rate is being touted as an indicator of “strength” on the incumbent’s campaign trail. Perhaps the populace buys it, perhaps they don’t; we’ll see come NOV 6th. For now, a rigorous analysis of the data (as opposed to overreacting to the headline print) would suggest that Obama’s odds of reelection may be less than indicated by various polls, as well as the latest reading from our Hedgeye Election Indicator.

Fixed Income: 10YR Yields busted back out for yet another week for the peripheral countries following the market’s optimism after last Friday’s EU Summit. Week-over-week, Spain’s 10 YR yield saw the biggest move of +67bps to 7.00%. Italy gained +22bps to 6.04% and Portugal gained +5bps to 10.21%. Conversely, French yields fell -28bps to 2.41%, followed by Germany at -20bps to 1.38% and Greece declined -10bps to 25.73%.

Changing Tides:

It was a week ago today that markets rallied hard on the EU Summit “conclusions”. Last week’s note titled “Not in my Lifetime” pointed out just how little substance the three paragraph statement actually contained. In this vein, there’s very little from a policy perspective that needs updating versus last week, because frankly Eurocrats don’t move that fast and as we’ve stated hundreds of times over, there’s a long road ahead for Europe to fix its sovereign and debt imbalances, and still a looming question if the Eurozone can sustain its current 17 member fabric. To the latter point, we expect Eurocrats to throw every kitchen sink and scrap for every available band-aid to keep their jobs and the structure together.

As we can see from peripheral yields and CDS spreads, as well as equity performance, there was quite a turn in sentiment this week? In particular, Spain’s 10YR yield is back up to that dangerous 7% mark. As a continuation of our work, the two main issues right here and now are the scope of the ESM (how it’s directed at bank recapitalizations and the implications if lending is through the sovereign, including with existing EFSF funds) and the scope of a pan-European banking authority (how’s it structured and what banks are included?). Yesterday in the ECB press conference President Mario Draghi gave little color on a European banking authority, including if the ECB would be a backstop for the future facility (see yesterday’s note July ECB Presser YouTubed).

Yesterday’s interest rate cuts from the ECB may prove marginally beneficial, yet again it’s a stretch to think that the cuts will have any impact on the existing sovereign and banking imbalances. After all, the LTROs proved highly ineffective. One point to stress, that the market may be looking towards, is any increased lending given the drop in the deposit rate to 0.00%, which is in essence begging banks to do something with their money besides park it for zilch. We expect the credit flow to broadly remain constrained for a protracted period as fundamentals and confidence continue to be bombed out.

EUR-USD:

Below is an updated EUR/USD price level chart. Our immediate term TRADE and intermediate term TREND support level is $1.22 and resistance is $1.25. Our call is that if $1.22 breaks, look out below! However, we’re not EUR parity folks because we see Eurocrats stepping in to prevent it.

France - Needs as much as €43 billion in savings this year and next, the national auditor said, setting the stage for budget cuts by Hollande.

Greece - The new government dropped a plan to seek softer terms for its second bailout following warnings that it would be rejected by international lenders. Finance minister Yannis Stournaras said, "The program is off-track and we can't ask for anything from our creditors before we get it back on course."

Italy - The government approved €4.5B ($5.58B) in spending cuts for 2012, aimed at slashing the size of Italy's public sector and delayed a new tax increase until after the first half of 2013. The size of the cuts is slightly larger than the €4.2B in cuts the government originally projected for this year. The cuts for 2013 are projected at €10.5B, and €11B for 2014.

Ireland - The country returned to the debt markets this week for the first time since its bailout in September 2010. It sold €500 million of 3-month bills, in line with the target, at an average yield of 1.8%.

Slovenia - According to Bloomberg, Slovenia is headed toward becoming the 6th Eurozone nation to seek a bailout.

Spain -Spanish Economy Minister Luis de Guindos said Madrid will pass additional measures in order to achieve its annual deficit target. (Spain has said that it will cut its deficit to 5.8% of GDP in 2012 from 8.9% last year). Unconfirmed sources say Spain's government is putting finishing touches to an up to €30 billion package of spending cuts and tax hikes to help it meet this year's deficit targets, which could be announced next week.

Risk Monitor:

Like sovereign yields, sovereign CDS were mixed on the week. Portugal rose +45bps to 853bps, followed by Spain at +16bps to 568bps. Italy gained +6bps to 514bps. For a second straight week Ireland saw the largest decline in CDS w/w at -49bps to 533bps, followed by France -8bps to 185bps and Germany -4bps to 100bps.

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION

CONCLUSION:The US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

Our call for US growth to slow – both directionally and relative to expectations – has been consistent since mid-MAR and this morning’s Payrolls miss is in support of our view. While the headline number of +80k MoM is indeed a sequential acceleration from an upwardly-revised +77k last in MAY, it does register as 20% miss relative to consensus expectations of a +100k gain.

While we remain unsure as to why the sell-side continues to attempt to forecast a made-up government number, we are sure that a +84k MoM gain in Private Payrolls (down from an upwardly-revised +105k in MAY) is an apples-to-apples signal that growth in the private sector is tepid at best. As an aside, it remains our longest of long-term views that US growth won’t meaningfully rebound without arousing the animal spirits of the private sector – something that cannot be accomplished amid incessant bouts of central planning. This is counter to the consensus view that our sovereign debt-laden central government is an integral part of the US economy that must not be reigned in – or else…

For more on this key topic of domestic fiscal reform, including our updated thoughts on the Debt Ceiling, Fiscal Cliff and the general election, please tune into our 3Q12 Macro Themes Call next Wednesday at 11:00am. Email for more details.

Jumping back to the JUN jobs report, the key takeaway from our analysis is that the US labor market remains firmly stuck in the mud, failing to improve or outright deteriorating on a number of key metrics:

Not that anyone was expecting a major step forward, but it’s clear that the data firmly implies the US labor market remains far worse off than the headline Unemployment Rate (SA) of 8.2% would suggest. You know conditions are not good when an 8.2% Unemployment Rate is being touted as an indicator of “strength” on the incumbent’s campaign trail. Perhaps the populace buys it, perhaps they don’t; we’ll see come NOV 6th. For now, a rigorous analysis of the data (as opposed to overreacting to the headline print) would suggest that Obama’s odds of reelection may be less than indicated by various polls, as well as the latest reading from our Hedgeye Election Indicator.

All told, the US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

Darius Dale

Senior Analyst

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07/06/12 10:34 AM EDT

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS

Employment data released by the Bureau of Labor Statistics is a positive for the restaurant industry. The third consecutive month of disappointing employment growth in Leisure & Hospitality merits caution over the longer term, however.

Employment by Age

Employment growth among the 20-24 YOA age cohort, which is important for the QSR industry, was robust in May. Employment growth among the other age cohorts was also strong, which is broadly encouraging for the industry. The 20-24 YOA group was the only one shown in the chart below that saw a (marginal) sequential deceleration in employment growth.

Industry Hiring

As implied by the Leisure & Hospitality employment data, which leads the narrower food service data by one month, employment growth in the limited- and full-service food industries continued to decelerate in May. On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 13k, following two months of sequential job losses in the sector. Looking at the second chart, below, it is clear that hiring in the Leisure & Hospitality industry has slowed over the last three months. A continuation of this trend will be a negative sign for intermediate- and long-term demand.

Howard Penney

Managing Director

Rory Green

Analyst

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